American Financial Group, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. AFG primarily underwrites specialized commercial property and casualty insurance. Unless stated otherwise, figures are in U.S. dollars; financial statement amounts are in millions.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $2,164 | $1,984 | $5,744 | $5,111 |
| Net earnings | $177 | $165 | $589 | $622 |
| Diluted EPS | $2.09 | $1.93 | $6.93 | $7.29 |
| Core net operating earnings (non-GAAP) | $208 | $192 | $657 | $738 |
| Core diluted EPS (non-GAAP) | $2.45 | $2.24 | $7.72 | $8.65 |
| P&C net earned premiums | $1,855 | $1,767 | $4,799 | $4,462 |
| P&C underwriting profit | $142 | $155 | $420 | $558 |
| P&C combined ratio | 92.3% | 91.2% | 91.3% | 87.5% |
| Net investment income | $168 | $151 | $583 | $549 |
Total revenue includes managed investment entity activity, including CLO income and related expenses. Core earnings are a company-defined non-GAAP measure; they exclude specified items such as realized securities gains and losses and special asbestos and environmental charges.
- Quarterly trend: Net earnings rose 7% year over year. Higher fixed-maturity investment yields and invested-asset balances, and lower realized securities losses, more than offset weaker Specialty casualty underwriting and lower alternative-investment returns.
- Year-to-date trend: Net earnings fell 5%; core net operating earnings declined 11%. Lower underwriting profit and lower alternative-investment returns versus a strong 2022 period were partly offset by higher fixed-maturity income and lower realized securities losses.
- Underwriting: Net earned premiums increased 5% in Q3 and 8% year to date. The combined ratio remained profitable, but worsened year over year by 1.1 percentage points in Q3 and 3.8 points year to date. Specialty casualty underwriting profit fell 34% in Q3, while year-to-date underwriting profit declined across all three Specialty sub-segments. Catastrophe losses were $56 million in Q3 and $138 million year to date.
- Cash flows: For the first nine months, operating cash flow was $1,214 million (versus $1,043 million); investing activities provided $459 million (versus using $1,062 million); financing activities used $1,324 million (versus $1,318 million). Cash and cash equivalents rose to $1,221 million from $872 million at year-end 2022.
- Balance sheet and debt: At September 30, total assets were $30,825 million, total liabilities $26,844 million, and shareholders’ equity $3,981 million. Long-term debt was $1,474 million carrying value ($1,498 million principal). Debt to total capital was 24.8%, or 13.6% excluding subordinated debt. AFG reported no borrowings under its new $450 million revolving facility, which expires in 2028, and no near-term debt maturities.
- Investments: Available-for-sale fixed maturities had a fair value of $9,931 million and gross unrealized losses of $691 million. Management said it intended and was able to hold the securities until recovery. Approximately 93% of fixed maturities were investment grade. A 100-basis-point immediate rate increase was estimated to reduce fixed-maturity fair value by $299 million pretax.
Material developments, outlook and risks
- Crop Risk Services acquisition: Completed July 3 for $234 million cash. Preliminary allocation included $124 million of amortizable intangible assets and $85 million of goodwill. The purchase-price adjustment remained subject to finalization; management did not expect it to be material.
- Verikai: AFG recorded a $26 million goodwill impairment after slower-than-anticipated growth and reduced the acquisition-related contingent consideration liability by $22 million. The net $4 million loss was reported as a realized loss on subsidiary.
- Asbestos and environmental matters: AFG recorded a $15 million pretax special charge to increase liabilities for exposures tied to former railroad and manufacturing operations. Its review found no net change in P&C segment A&E reserves, which were $374 million net of reinsurance recoverables. Management identifies reserve adequacy and former-operation contingencies as significant risks.
- Capital returns: AFG repurchased 1.33 million shares for $153 million and paid a $4.00-per-share special dividend in February. After quarter-end, it declared a $1.50-per-share special dividend, payable November 22, 2023.
- Management outlook: Management expected continued premium growth and strong underwriting results in what it viewed as a favorable P&C market. It expected elevated interest rates and the deployment of cash to support fixed-maturity investment income through 2023 and into 2024. No specific numerical earnings or premium guidance was provided.
- Key risks: Management cited economic and social inflation, medical-cost trends, catastrophe and severe-weather losses, competitive pricing, reserve uncertainty, reinsurance availability and collectability, investment-market and interest-rate movements, credit quality, regulatory or tax changes, and cyber or technology disruptions. The filing also notes uncertainty about whether AFG will be subject to the Inflation Reduction Act corporate alternative minimum tax.
Important facts for investors to verify
- Whether premium growth and favorable renewal pricing can offset increased catastrophe losses, expense ratios and weaker Specialty casualty results.
- Further development in prior-year claims reserves, including A&E, public-sector and excess-liability exposures; P&C reserve estimates remain sensitive to claims experience and assumptions.
- Whether fixed-maturity unrealized losses recover without forced sales or material credit impairment, and how interest-rate changes affect investment values and liquidity.
- Performance and valuation of alternative investments, CLO interests and Level 3 assets, as well as execution and returns from the CRS acquisition and Verikai investment.
- Parent-company liquidity and capital allocation after the declared special dividend, share repurchases and acquisition spending; consolidated cash includes balances not necessarily available to the parent.